Property and Liability Insurance

Many individuals and businesses buy property and liability insurance to protect their assets against financial loss. Property insurance provides direct compensation if a policyholder's possessions are damaged, destroyed, or lost as a result of perils specified in the policy. A peril may be natural or the consequence of human actions. Commonly insured natural perils include fires, tornadoes, and hail. Perils caused by the actions of people include automobile accidents, burglary, and arson. Policies may be written on an all-risks basis. But some perils, such as war and nuclear contamination, are not covered under such policies.

Property insurance policies limit the amount of compensation for losses. Nearly all policies have a deductible for which the policyholder is liable. The sum the policyholder can recover also is limited by the face value of the policy. Most policies pay losses on the basis of what it would cost to replace the property. Other policies restrict compensation to the actual cash value of the property-that is, the replacement cost of the property minus depreciation.

Liability insurance protects individuals and businesses against possible financial losses if their actions result in bodily injury to others or in harm to property owned by others. A victim of such actions could sue the person or business responsible. If the court judges the defendant to have been negligent, it may order the defendant to pay damages to the victim. Liability insurance pays for these damages and a policyholder's defense costs. Most liability cases are settled out of court. In such cases, the policyholder's insurance company and the person claiming injury agree on the amount of the damages. Liability insurance thus indirectly protects a policyholder's assets, which would otherwise be used to pay the damages. Most insurance experts recommend that policyholders carry high liability limits.

Insurance companies sell several types of property and liability insurance. The main types of individual coverage are (1) homeowners' insurance and (2) automobile insurance. Most people can obtain sufficient property and liability coverage by buying both types.